Quantitative Easing and the Art Market

Spears recently posted an article on the connection between the Fed's policy of quantitative easing and the upper end of the art market.  The policy, the article states, keeps interest rates low which attracts additional capital into the stock market.  As stock prices increase, high net worth individuals gain confidence in the market and have available funds to invest in the art market.  The article notes that QE only impacts the upper end of the art market and not the middle market.

By the way, the Fed announced on Wed that it would continue to purchase bonds through its quantitative easing program at a rate of $85 billion per month in order to support the economy and keep interest rates low. If you buy into what Spears is reporting, then expectations for the short term art market at the top end should remain strong.

Spears reports on the connection.

 Indeed, there seems little doubt that the Fed’s policy of quantitative easing, or what it prefers to call its long-term asset purchases, has stimulated the upper end of the art market. One only needs to look at Christie’s Contemporary sale in May, which set a record for a single auction: $495 million, including a $58 million Pollock, seven lots over $20 million and twelve artist records.

The Fed’s current purchases of $85 billion a month have led to an accumulation of more than $2 trillion of long-term assets. This artificially drives down interest rates, which pushes income-chasing capital into the stock market, which then rises, increasing both confidence and the funds available for private collectors to reallocate towards the art market.

Bernanke’s term of office ends next January, but his probable successor, the liberal Janet Yellen, vice-chair of the Fed’s board of governors, is said to be an equally staunch supporter of quantitative easing, so the future direction of the dollar is almost certainly down. The dollar has already lost around 10 per cent of its purchasing power since Barack Obama came to power and this sends investors looking for hard assets, which explains the strength of gold (until the recent correction), property and art.

It is also uncertainty that is driving the upper end of the art market, and this can only partially be attributed to Bernanke. Too much uncertainty, as in 2007 and 2008, leads to a fall in the art market, but a little uncertainty fuels its attractiveness as a safe haven. Youth unemployment has reached epidemic proportions in many countries (56 per cent in Spain, 64 per cent in Greece), Spain is in depression, Germany is unwilling to foot the bill for Europe, China is slowing and the USA has a tepid recovery only.

The result of all this turmoil can be seen in the
sales of Impressionist & Modern and Postwar & Contemporary art at Sotheby’s and Christie’s in May, where rare and important paintings achieved high prices. As well as the $58 million Pollock (estimate $25-35 million), Lichtenstein’s Woman with Flowered Hat went for $56 million, Barnett Newman’s Onement VI for $44 million and Cézanne’s Les Pommes for $42 million (estimate $25-35 million).

Both the Russians and the Chinese were out in force. The Russians bid on works by Wassily Kandinsky, Chaim Soutine, Edouard Vuillard and Vincent van Gogh, and were successful with Pierre-Auguste Renoir’s Vase de Pivoines. The Soutine was Le Petit Pâtissier of 1927, and it made $18 million, within the estimate of $16-22 million, and is believed to have been bought by a Chinese collector.

An onshore option

Other factors driving these huge prices in the art market include capital that has been pushed back onshore from the opening-up of tax havens such as Switzerland and Liechtenstein. Even Singapore, which was the main beneficiary of the Swiss disclosure agreements, has been forced to pass a law that makes tax evasion a crime, which becomes effective on 1 July this year. 

Source: Spears